Nearly 90% of retired workers depend on Social Security to some extent, and more than half of those individuals say their monthly benefit represents a major source of income. That means any changes to the program could have a material impact on the financial well-being of millions of Americans, which makes it essential for retirees (and future retirees) to stay informed.
With that in mind, a couple big changes are coming to Social Security in 2023. Here's what you need to know.
A new cost-of-living adjustment
Rampant inflation has taken a toll on Americans this year, and the impact has been especially brutal at gas stations and grocery stores. Over the last 12 months, energy prices skyrocketed 32.9%, and food prices climbed 10.9%, according to the U.S. Labor Department. To that end, retirees will likely see a massive cost-of-living adjustment (COLA) in 2023.
In fact, The Senior Citizens League estimates benefits could jump 9.3% to 10.1% next year, marking the largest COLA since 1981. That means the average monthly benefit paid to retired workers could increase by up to $168. Generally speaking, that makes sense. Inflation hit a 40-year high in June, so it's logical the 2023 COLA will be the biggest in 40 years.
Of course, those are preliminary estimates. The Social Security Administration (SSA) calculates COLAs using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Specifically, it compares the CPI-W from the third quarter (July through September) of the current year to the same quarter the previous year. The percent increase (if any) becomes the COLA for the following year.
That means the official COLA for 2023 cannot be calculated until after the end of Sept. 2022, so retirees should look for an update from the SSA in mid-October.
A new earnings limit
It is possible to receive Social Security retirement benefits while still working. If you have reached full retirement age (FRA), you will receive your full benefit regardless of how much you earn. But if you choose to claim benefits prior to your FRA, a portion of your benefit will be withheld. And the amount withheld depends on two things: the length of time until your FRA and the annual income limit (also called the retirement earnings test exempt amount).
In 2022, individuals under FRA for the entire year can earn up to $19,560. Anything over that total will result in a benefit withholding of $1 for every $2 over the limit. For example, an individual who earns $29,560 (i.e., $10,000 over the limit) will see their benefits reduced by $5,000 during the year.
Similarly, individuals under FRA for a portion of the year can earn up to $51,960. Anything over that total will result in a benefit withholding of $1 for every $3 over the limit. For example, an individual who reaches FRA in November and earns $63,960 in the first 10 months of the year (i.e., $12,000 over the limit) will see their benefits reduced by a third during the first 10 months of the year. After reaching FRA in November, the individual will receive their full benefit.
Income limits change each year, but the cap has increased at 3% annually over the past decade. Seniors should expect the SSA to publish the official 2023 income limits in mid-October. At that point, the calculator provided by the SSA can be used to estimate benefit withholdings.
